Mexico raises rate 50 bps, not start of tightening cycle

     Mexico's central bank raised its benchmark target for the interbank overnight rate by 50 basis points to 4.75 percent, as expected by many economists, to counter inflationary pressures and anchor inflation expectations but added that this hike should not be seen as the start of a rate tightening cycle.
    The Bank of Mexico, which has now raised its rate four times by a total of 175 basis points since the U.S. Federal Reserve's 25-point hike last December, added that it would closely follow all factors that determine inflation and inflation expectations, especially the transfer the peso's exchange rate to consumer prices, along with the relative monetary position to the U.S. and the economy's output gap.
    The peso fell to a record low of almost 20 to the U.S. dollar earlier this week but gained back some ground following a debate between the two U.S. presidential candidates.
    The peso has dropped as polls earlier this month showed that Republican candidate Donald Trump - who wants to renegotiate a trade deal with Mexico and build a wall between the two countries - had gained on his Democratic rival, Hillary Clinton.
    The central bank said the peso had "showed a significant depreciation and high volatility" among emerging market currencies since its last board meeting in August and there is a risk that volatility could return to financial markets if there is nervousness about the possible implications for Mexico from the U.S. presidential election.
    Today the peso was trading at 19.48 to the U.S. dollar, down 11.7 percent this year.
    Mexico's inflation rate rose to 2.73 percent in August from 2.65 percent in July but the central bank said it expects inflation to slowly rise over the next few months and end the year slightly above its 3.0 percent target.
    By 2017 headline and underlying inflation is seen around the inflation target though the central bank added that the short-term balance of risks to inflation have deteriorated as depreciation of the peso cannot be ruled out along with sudden increases in agricultural goods.
    The balance of risks to the economy have also deteriorated, the bank said, as the growth in private consumption slowed while investment and external demand was weak and the industrial sector has remained stalled.
    Mexico's Gross Domestic Product shrank by 0.2 percent in the second quarter from the first for annual growth of 2.5 percent, up from 2.4 percent in the first quarter.

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